Pizza Hut 2005 Annual Report Download - page 57

chising฀ proceeds.฀ Accordingly,฀ actual฀ results฀ could฀ vary฀
significantly฀from฀our฀estimates.
Impairment฀ of฀ Investments฀ in฀ Unconsolidated฀ Affiliates฀ ฀
We฀ record฀ impairment฀ charges฀ related฀ to฀ an฀ investment฀
in฀an฀unconsolidated฀affiliate฀whenever฀events฀or฀circum-
stances฀ indicate฀ that฀ a฀ decrease฀ in฀ the฀ value฀ of฀ an฀
investment฀has฀occurred฀which฀is฀other฀than฀temporary.฀In฀
addition,฀ we฀ evaluate฀ our฀ investments฀ in฀ unconsolidated฀
affiliates฀for฀impairment฀when฀they฀have฀experienced฀two฀
consecutive฀ years฀ of฀ operating฀ losses.฀ Our฀ impairment฀
measurement฀test฀for฀an฀investment฀in฀an฀unconsolidated฀
affiliate฀is฀similar฀to฀that฀for฀our฀restaurants฀except฀that฀we฀
use฀discounted฀cash฀flows฀after฀interest฀and฀taxes฀instead฀
of฀discounted฀cash฀flows฀before฀interest฀and฀taxes฀as฀used฀
for฀our฀restaurants.฀We฀recorded฀no฀impairment฀associated฀
with฀our฀investments฀in฀unconsolidated฀affiliates฀during฀the฀
years฀ended฀December฀31,฀2005,฀December฀25,฀2004฀and฀
December฀27,฀2003.
Considerable฀ management฀judgment฀is฀ necessary฀to฀
estimate฀future฀cash฀flows.฀Accordingly,฀actual฀results฀could฀
vary฀significantly฀from฀our฀estimates.
Asset฀ Retirement฀ Obligations฀ Effective฀ December฀29,฀
2002,฀ we฀ adopted฀ SFAS฀ No.฀ 143,฀ “Accounting฀ for฀ Asset฀
Retirement฀Obligations”฀(“SFAS฀143”).฀SFAS฀143฀addresses฀
the฀financial฀accounting฀and฀reporting฀for฀legal฀obligations฀
associated฀with฀the฀retirement฀of฀tangible฀long-lived฀assets฀
and฀the฀associated฀asset฀retirement฀costs.฀As฀a฀result฀of฀
obligations฀under฀certain฀leases฀as฀of฀December฀29,฀2002฀
that฀were฀within฀the฀scope฀of฀SFAS฀143,฀we฀recorded฀a฀cumu-
lative฀effect฀adjustment฀of฀$2฀million฀($1฀million฀after฀tax)฀
which฀did฀not฀have฀a฀material฀effect฀on฀diluted฀earnings฀per฀
common฀share.฀The฀adoption฀of฀SFAS฀143฀also฀did฀not฀have฀
a฀material฀impact฀on฀our฀Consolidated฀Financial฀Statements฀
for฀ the฀ years฀ ended฀ December฀31,฀ 2005,฀ December฀25,฀
2004฀or฀December฀27,฀2003.
Guarantees฀ We฀account฀for฀ certain฀ guarantees฀in฀accor-
dance฀ with฀ FASB฀ Interpretation฀ No.฀ 45,฀ “Guarantor’s฀
Accounting฀ and฀ Disclosure฀ Requirements฀ for฀Guarantees,฀
Including฀Indirect฀Guarantees฀of฀Indebtedness฀to฀Others,฀an฀
interpretation฀of฀FASB฀Statements฀No.฀5,฀57฀and฀107฀and฀a฀
rescission฀of฀FASB฀Interpretation฀No.฀34”฀(“FIN฀45”).฀FIN฀45฀
elaborates฀on฀the฀disclosures฀to฀be฀made฀by฀a฀guarantor฀in฀its฀
interim฀and฀annual฀financial฀statements฀about฀its฀obligations฀
under฀guarantees฀issued.฀FIN฀45฀also฀clarifies฀that฀a฀guar-
antor฀is฀required฀to฀recognize,฀at฀inception฀of฀a฀guarantee,฀a฀
liability฀for฀the฀fair฀value฀of฀certain฀obligations฀undertaken.
We฀have฀also฀issued฀guarantees฀as฀a฀result฀of฀assigning฀
our฀ interest฀ in฀ obligations฀ under฀ operating฀ leases฀ as฀ a฀
condition฀ to฀the฀ refranchising฀of฀ certain฀ Company฀ restau-
rants.฀Such฀guarantees฀are฀subject฀to฀the฀requirements฀of฀
SFAS฀No.฀145,฀“Rescission฀of฀FASB฀Statements฀No.฀4,฀44,฀
and฀64,฀Amendment฀of฀FASB฀Statement฀No.฀13,฀and฀Technical฀
Corrections”฀(“SFAS฀145”).฀We฀recognize฀a฀liability฀for฀the฀fair฀
value฀of฀such฀lease฀guarantees฀under฀SFAS฀145฀upon฀refran-
chising฀and฀upon฀any฀subsequent฀renewals฀of฀such฀leases฀
when฀we฀remain฀contingently฀liable.฀The฀related฀expense฀in฀
both฀instances฀is฀included฀in฀refranchising฀gains฀(losses).
Cash฀ and฀Cash฀Equivalents฀ Cash฀equivalents฀represent฀
funds฀we฀have฀temporarily฀invested฀(with฀original฀maturities฀
not฀exceeding฀three฀months)฀as฀part฀of฀managing฀our฀day-to-
day฀operating฀cash฀receipts฀and฀disbursements.
Inventories฀ We฀value฀our฀inventories฀at฀the฀lower฀of฀cost฀
(computed฀on฀the฀first-in,฀first-out฀method)฀or฀net฀realiz-
able฀value.
Property,฀Plant฀and฀Equipment฀ We฀state฀property,฀plant฀
and฀equipment฀at฀cost฀less฀accumulated฀depreciation฀and฀
amortization฀and฀valuation฀allowances.฀We฀calculate฀depre-
ciation฀and฀amortization฀on฀a฀straight-line฀basis฀over฀the฀
estimated฀useful฀lives฀of฀the฀assets฀as฀follows:฀5฀to฀25฀
years฀for฀ buildings฀ and฀improvements,฀3฀to฀20฀years฀for฀
machinery฀and฀equipment฀and฀3฀to฀7฀years฀for฀capitalized฀
software฀costs.฀As฀discussed฀above,฀we฀suspend฀deprecia-
tion฀and฀amortization฀on฀assets฀related฀to฀restaurants฀that฀
are฀held฀for฀sale.
Leases฀and฀Leasehold฀Improvements฀ We฀account฀for฀our฀
leases฀ in฀ accordance฀ with฀ SFAS฀ No.฀ 13,฀ “Accounting฀ for฀
Leases”฀ and฀ other฀ related฀ authoritative฀ guidance.฀ When฀
determining฀the฀lease฀term,฀we฀often฀include฀option฀periods฀
for฀which฀failure฀to฀renew฀the฀lease฀imposes฀a฀penalty฀on฀the฀
Company฀in฀such฀an฀amount฀that฀a฀renewal฀appears,฀at฀the฀
inception฀of฀the฀lease,฀to฀be฀reasonably฀assured.฀The฀primary฀
penalty฀to฀which฀we฀are฀subject฀is฀the฀economic฀detriment฀
associated฀with฀the฀existence฀of฀leasehold฀improvements฀
which฀might฀be฀impaired฀if฀we฀choose฀not฀to฀continue฀the฀
use฀of฀the฀leased฀property.
In฀2004,฀we฀recorded฀an฀adjustment฀to฀correct฀instances฀
where฀our฀leasehold฀improvements฀were฀not฀being฀depre-
ciated฀over฀the฀shorter฀of฀their฀useful฀lives฀or฀the฀term฀of฀
the฀lease,฀including฀options฀in฀some฀instances,฀over฀which฀
we฀were฀recording฀rent฀expense,฀including฀escalations,฀on฀
a฀straight฀line฀basis.฀The฀cumulative฀adjustment,฀primarily฀
through฀ increased฀ U.S.฀ depreciation฀ expense,฀ totaled฀
$11.5฀million฀($7฀million฀after฀tax).฀The฀portion฀of฀this฀adjust-
ment฀that฀related฀to฀2004฀was฀approximately฀$3฀million.฀As฀
the฀portion฀of฀the฀adjustment฀recorded฀that฀was฀a฀correction฀
of฀errors฀of฀amounts฀reported฀in฀our฀prior฀period฀financial฀
statements฀was฀not฀ material฀to฀any฀of฀those฀prior฀ period฀
financial฀statements,฀the฀entire฀adjustment฀was฀recorded฀in฀
the฀2004฀Consolidated฀Financial฀Statements฀and฀no฀adjust-
ment฀was฀made฀to฀any฀prior฀period฀financial฀statements.
We฀record฀rent฀expense฀for฀leases฀that฀contain฀sched-
uled฀rent฀increases฀on฀a฀straight-line฀basis฀over฀the฀lease฀
term,฀including฀any฀option฀periods฀considered฀in฀the฀deter-
mination฀of฀that฀lease฀term.฀Contingent฀rentals฀are฀generally฀
based฀on฀sales฀levels฀in฀excess฀of฀stipulated฀amounts,฀and฀
thus฀are฀not฀considered฀minimum฀lease฀payments฀and฀are฀
included฀in฀rent฀expense฀as฀they฀accrue.฀We฀generally฀do฀not฀
receive฀leasehold฀improvement฀incentives฀upon฀opening฀a฀
store฀that฀is฀subject฀to฀a฀lease.฀We฀capitalize฀rent฀associ-
ated฀with฀leased฀land฀or฀buildings฀while฀we฀are฀constructing฀
a฀restaurant฀even฀if฀such฀construction฀period฀is฀subject฀to฀
a฀rent฀holiday.฀Such฀capitalized฀rent฀is฀then฀expensed฀on฀a฀
straight-line฀basis฀over฀the฀remaining฀term฀of฀the฀lease฀upon฀
opening฀of฀the฀restaurant.฀We฀will฀begin฀expensing฀rent฀for฀
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 61.